China Southern eyes acquisition opportunities

Having operated in Hong Kong for close to a year, Chang Huifeng, CEO of CSOP Asset Management, says the time has come for the firm to revise its corporate strategy. The firm is aggressively putting more of its principal capital to work, and is on the lookout for potential acquisition targets in the region.

CSOP Asset Management is a 70:30 joint venture between China Southern Fund Management and the Oriental Patron Financial Group in Hong Kong. It is the QDII portfolio advisor to its mainland parent's investments in Hong Kong.

"In late 2007, strong demand for overseas investment products has made managers feel the need to move their investment research function to follow their investments to Hong Kong," Chang says. By the autumn of 2008, with the global market deep in crisis, asset managers fighting for survival scaled all QDII efforts to a minimum and switched to conservative strategies.

"This year, the world has come out of the crisis; we have got back on our feet and we have begun investing our principal capital aggressively. However, Western firms are still going through a very painful process. They are still suffering ongoing capital erosion. Many of them still have to divest from their Asian assets." He sees the second half of this year as a prime time for CSOP to pick up assets available in the market.

Citing Beijing-based Harvest Fund Management's recent takeover of DWS's Asian equity platforms as an example, Chang says the timing is excellent for Chinese firms with strong balance sheets to seize buyout opportunities in the region. In keeping up with competitive trends, CSOP should not be an exception.

"We need to speed up our expansion. We are in discussion with our shareholders, evaluating our best options. In my view, the faster we seize these opportunities available to us, the better," Chang says. Several potential targets have already been identified. However, because of the sensitivity of the plan, Chang says he could reveal little more at this stage, although he does not rule out an expansion plan based on aggressive hiring.

Although China Southern was the first firm to receive approval from the industry regulator to expand to Hong Kong, more of its competitors have since caught up in having a Hong Kong presence, and have made moves to expand their investment coverage to the Asian region.

The total headcount at the CSOP entity is 10; the firm's investment/ research team now includes one trader, two analysts, one chief strategist (who will start work next month), and a CIO. The team's investment focus is targeted towards Hong Kong equities. It shares investment research resources on Chinese companies with its parent China Southern and Oriental Patron.

Aside from servicing Southern's offshore strategies for Hong Kong, the firm is also seeking outsourced QDII mandates and potential advisory deals from mainland banks, insurance and trust companies.   

Early this month, the firm launched a Cayman-registered Greater China long/short fund targeted towards professional investors. Chang says the firm has raised close to HK$200 million ($25.8 million) from Chinese corporate treasuries and Chinese entrepreneurs, who aside from its mainland parent, now makes up the bulk of the firm's investor base.

"Later this year we will turn our attention to overseas investors; QFII. We are still in the process of building a track record, with which they can evaluate our investment performance," Chang says. He notes investments in Hong Kong-listed Chinese stocks made by CSOP's CIO Michael Wen had outperformed the HKCEI by almost 12% year-to-date.

Because of a technical difficulty in obtaining the necessary FX quota from the State Administration of Foreign Exchange required to move China Southern's QDII assets to Hong Kong, legally speaking, CSOP did not start investing for Southern until April this year. Its track record is no more than a few months old.

Later on, the China Securities Regulatory Commission issued its rules stating that staff in Hong Kong subsidiaries of mainland asset management firms should not hold dual roles in both the Hong Kong and mainland entities. As a result, Michael Wen relinquished his role as a portfolio manager with Southern in Shenzhen and was promoted to the CIO role at CSOP.

Chang refused to comment on the breakup between China Southern and BNY Mellon. But notes the overseas component of China Southern's first QDII has fully transferred to Wellington, which will act as its new advisor. Meanwhile, he notes China Southern's second QDII -- a passive offering jointly developed with Standard & Poor's based on the S&P500 index -- is now in a late-stage approval process with the CSRC.   

Chang also says he has been approached by foreign firms for opportunities to jointly develop fund-of-fund products or commodities trading deals. While interesting on paper, he says most of these proposals are implausible business strategies for CSOP.